Finance Minister Masajuro Shiokawa made a fresh proposal Wednesday to implement tax cuts of 1.5 trillion yen over a five-year period while simultaneously imposing tax hikes.
Shiokawa told a news conference that he made the proposal to Prime Minister Junichiro Koizumi as the basis for further discussions on tax reforms.
In response, Koizumi said the matter should be discussed by the government’s Tax Commission and the Council on Economic and Fiscal Policy before releasing a final proposal in October, Shiokawa said.
The proposal is to conduct both tax cuts and tax hikes over a five-year period, although the amount of tax cuts is expected to exceed that of the tax hikes in the early phase of the period to help revitalize the economy.
However, the amount of the tax hike is designed to exceed that of the tax cuts in later years in order to offset the revenue loss caused by the tax cuts.
Shiokawa said his latest proposal does not include lowering the corporate tax rate, which has been suggested by some members of the Council on Economic and Fiscal Policy, a powerful government panel.
Shiokawa’s proposal is the latest in a series of proposals on the tax issue since Koizumi announced his plan in July to implement tax cuts of more than 1 trillion yen.
In August, Shiokawa proposed that tax cuts be implemented over a three-year period, and that the resulting revenue loss be offset by tax increases over a five-year period.
More recently, he floated the idea of implementing up to 2.5 trillion yen in tax cuts on condition that a tax revenue balance is achieved over a certain period of time.
The tax issue reflects discord between the Finance Ministry, which hopes to secure tax revenue amid worsening fiscal conditions, and private-sector members of the council, which attaches importance to revitalizing the economy by stimulating consumer spending.
The government said Wednesday that Japan faces increasing downside risks but maintained as “improving” its overall view for the current state of the economy.
Movements of a nascent recovery “can be seen in some areas of the economy, though the environment has become more severe,” the Cabinet Office said in its monthly report for September.
The improving trend is expected to continue for the short term it said.
It added, however, that “the environment, such as concerns over the future of the U.S. and other economies and the decline in domestic stock prices, has become more severe,” posing increasing downward pressure.
In its May report, the office declared for the first time since June 1999 that the economy had bottomed out on the back of strong exports to the U.S. and other overseas markets.
It further upgraded the assessment in July.
In the August report, it mentioned downside risks, following slower-than-expected U.S. economic growth in the second quarter, while maintaining that the economy was improving.
The further warning on downside risks in the latest report reflects a weakening trend in “favorable momentum” from strong exports, which helped improve corporate earnings, capital investment and employment in the recent past, said Jun Saito, director for economic assessment and policy analysis at the office.
“The environment has become more severe as have prospects for the future of the Japanese economy,” he said.
The office downgraded its assessment of exports, production and public investment, but upgraded that for private-sector capital investment, corporate earnings and employment.
It said growth in exports to Asian markets has slowed, especially exports of information technology-related products, such as semiconductors.
Considering the rising uncertainty over the U.S. economy and a downward revision by analysts on worldwide microchip demand in the latter half of this year, exports in the latter half of this year will show smaller growth than in previous months, it said.
Movement toward recovery in production has also slowed, with the industrial production index showing broadly flat movement since the May to July period.
The slide in private-sector capital investment, however, has shown signs of abating and corporate earnings have begun to level off. The employment situation has even improved in some areas.
Among overseas markets, the office noted a slowdown in the U.S. economic recovery, citing, in particular, a deterioration in consumer confidence.
A “zero interest rate” campaign on car loans begun in July has stimulated vehicle sales in the U.S., but other than that, consumer sentiment has deteriorated, it said.
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